Corporations embracing the startup disruptor threat

Another output from last month’s Global Entrepreneurship Congress (GEC) has been the discussion around the expanding role of corporations in entrepreneurial ecosystems. In one meeting at the GEC with the CEOs of two old and established corporations within the same value chain, I was directly asked for specific ideas concerning which startup communities might boast the most dynamic thinkers in some defined arenas of their operations. The challenges they were facing were clearly urgent enough to seek disruptive innovators outside of their own corporate R&D departments. I wondered how many other large traditional multi-nationals might be eyeing founders in the same way.

Similar to government, corporations have not always been viewed as friends to startup communities. In fact, entrepreneurs often see them as opponents to disrupt or worse, monopolies to break. However, much like today’s generation of policymakers who see the power of new and young business to the economy and society, corporate leaders are newly incentivized to think and act outside their comfort zone and to tap on the potential of entrepreneurs.

Corporations used to be attracted to tech startup communities by the opportunity to scout tech talent. However, while relatively new to ecosystem building, corporations today are not only seeking to acquire innovative, high-potential startups, but also trying to mimic the thought process of such entrepreneurs and the agile culture of young companies. Their wider goal is to boost in-house innovation and problem-solving. As the OECD has noted for its members, the traditional ‘closed’ in-house innovation model of the R&D labs of large corporations has given way to open and collaborative business innovation processes.

As a result, we are seeing big firms that actively seek to create closer relationships with startups, drawing on a broader spectrum of strategies. Given that traditional Corporate Social Responsibility (CSR) has fallen short in delivering the required levels of strategic engagement, more mechanisms have emerged through which corporations are building bridges to specific startup communities, including:

Corporate accelerators: The explosion of accelerator programs worldwide, which I discussed last week, has been, in part, propelled by corporate support for them. As noted on the Kauffman Foundation’s Growthology blog, corporations operate accelerators in three different modalities: internally (e.g., Telefonica’s Wayra; Kaplan’s EdTech Accelerator), outsourced (e.g., Techstars has run accelerator programs for a handful of corporations, such as Barclays and Virgin Media), or through partnerships (e.g., Microsoft is a partner of the EO Accelerator Program).

Corporate Venture Capital (CVC): Think Google Ventures. CVC is perhaps the most costly and risky approach. But according to INSEAD and venture-capital firm 500 Startups, which recently documented the ways in which Forbes Global 500 companies are engaging with startups, CVC is nevertheless still the most popular channel for corporate-startup engagement. This report also points out that nearly 62 percent of The Wall Street Journal’s Billion Dollar Startup Club have received funding from at least one corporation (not including investment firms and banks). While CVC requires resources and even a specialized structure within a corporation, it naturally allows firms to build closer and longer-term relationships with startups.

Startup competitions: The INSEAD-500 Startups report found that 15 percent of Forbes Global 500 companies have directly engaged in competitions, which typically involve pitching contests, mentoring and cash prizes. Sponsoring and running startup competitions is perhaps the less costly and less risky approach to building relationships with entrepreneurs and has given rise to platforms such as Startup Compete to automate and create efficiencies.

Support services and packages for startups: Beyond banks’ startup loans, several other types of firms offer packages of services and products specifically tailored for young companies, such as PayPal’s fee waiver for transactions up to US $1.5 million. Working with startups allows incumbents to get a better sense of how new and innovative companies work.

Entrepreneurs-in-Residence (EIR): Bringing disruptive potential under a big firm’s roof is an approach used by both corporations and government to spark innovation. Dell’s Entrepreneur-in-Residence program is one example. The challenge with this approach is that it requires corporations to carefully think about performance indicators and incentives for entrepreneurs to join, even if they are seeking entrepreneurs to commit for a limited period of time. Entrepreneurs are typically wary of working in-house at large corporations. “They like the autonomy of their own schedule, their own creations and their own imagination. They do not want to be bothered by red tape, a cubicle and a limit on how much money they can make or how high they can climb on a corporate ladder,” explains one observer.

Beyond rethinking incentives and performances indicators, EIR programs seek to have a lasting impact – something important for firms who need a well-thought-out long-term strategy that embraces mindset change. In order for startup engagement to translate into actual culture change and internal learning, Dell for example, permanently added ‘entrepreneurial spirit’ as a key performance indicator for all of its employees.

Sponsoring events: Most incumbents start experimenting in the startup world by offering much appreciated support for one-off startup events. Several choose to engage in events to help their company soft-land in a new location. For example, Google for Entrepreneurs sponsored the Startup Nations Summit in Korea in 2014, just as they were opening a campus location in Seoul. This exposure offered them a channel to connect with the Korean startup community.

While the impetus for engagement is clear, many argue that most corporations are still walking in the dark when it comes to connecting with startups. “It’s hard to refute the idea of corporates and startups working together; the benefits are obvious. Still, most get it wrong,” argues Khailee Ng, managing partner at 500 Startups.

For this reason, the United Kingdom’s Nesta has developed guidelines for successful corporate startup collaborations, based on case studies performed with support from the European Commission’s Startup Europe Partnership, which had bet on the value of engaging corporates. The “Winning Together” report is the first in the series of studies underway by Nesta. Among the recommendations for corporates are:

But what do entrepreneurs stand to gain from all this?

Quite a lot, actually. From the point of view of innovation, a healthy corporate-startup relationship allows moving new technologies from ideation to pilot and execution in a shorter time period than any of these two actors would be able to achieve alone.

Robert Litan, Carl Schramm, and William Baumol noted the role of big firms in entrepreneurial economies in Good Capitalism, Bad Capitalism. They observe that the best performing economic system blends elements of the entrepreneurial and big-firm strains. Entrepreneurial capitalism brings to fruition the possibilities opened when merging the unique skill sets of corporations and startups.

This is because startups, unshackled by established thought processes, invent solutions that improve productivity and solve challenges, but lack the structure and financial capital, which big firms have, to refine the concept and, more importantly, to mass-produce them and reach bigger markets.

It is no coincidence the most entrepreneurial universities have strong links to industry.

There is also another important aspect of the corporate-startup relationship: Big firms have often given entrepreneurial minds the experience necessary for them to launch and scale success new business. Take Ewing Marion Kauffman who would have turned 100 this September. His career featured an important period where he was a pharmaceutical salesman for a big firm. Mr. Kauffman reached a corporate ceiling that did not fit his entrepreneurial vision when his sales area was cut because his commissions were more than the president of the company’s salary. So he founded and grew his own pharmaceutical company and went on to create the Kauffman Foundation, which has, in turn, had an even bigger impact on entrepreneurship throughout the United States.

Policymakers take note and join forces

“Policymakers should support organizations and initiatives that create bridges between corporates and startups” concluded Nesta’s report. The EC’s Startup Europe Partnership did this through public–private partnerships. The White House achieved it by supporting an independent private sector alliance, running in parallel to its Startup America campaign.

For its part, the Dutch government’s Startup Delta initiative, led by Special Envoy and former EC Commissioner for startups Neelie Kroes, included incumbents in its entrepreneurship education strategies, developing ‘Code pact’ in which corporates contribute to coding in the curriculum of primary schools to change the very education model that was built to supply large corporations with the talent they needed in another era.

While policymakers sometimes struggle with generating corporate buy-in for policies that open the gates to new entrants in traditional markets (which can upset established business models as in the case of Uber), it has become clear that new firms are needed to maintain the dynamism of our nation’s oldest and largest employers.

Ultimately, the United States needs a new series of symbiotic partnerships where disruptive teams outside an industry or corporation co-create new products and services, accelerating value creation, leveling national and regional economic growth rates, and ultimately, better serving society.

Photo credit: Flickr, Flickr